Big Picture : Fed Behind the Curve

Aug 3, 2024

The Week That Was

US assets sold off this past week while bond yields collapsed as the market begins to price in a high probability of a significant slowdown in GDP growth in the world’s largest economy.

Anecdotal data is clearly suggesting this with Pmi’s released last week showing further deteriorations. There are global considerations here as well.

The BOJ finally after 18 months is starting to dial up its normalization of policy. This however will have the impact of reducing the net amount of liquidity in the global system. Bond purchase tapers, Jpy strength and higher short end rates will weigh on local equities and impact global equities as well.

China also remains mired in a deflationary trap with no clear way of finding a way out. They have announced some micro policies and issued broad brush strokes on overall strategy but deflation requires a forceful hammer that instills confidence in market participants that authorities stand behind asset prices come what may. That level of commitment is currently absent from the Chinese posture so a disinflationary wind will blow from Asia onto North American shores, both from Japan and China.

European growth also remains pegged below 1.5% with the Ecb initially sounding forceful but now pivoting more non-commital. So China is in deflation, Japan is tightening aggressively, Ecb is non commital and you could argue that the Fed is now behind the curve.

The month of August tends to be illiquid in financial markets and there is no real policy support arriving until the middle of September. During that period of time, weaker data in the US will worry markets as will the performance of Japanese and Chinese assets as a whole.

US election uncertainty and the rising possibility of a left leaning democratic government may also compound pressure on stocks that have run up considerably this year on a positive growth outlook, a supportive Fed and market friendly president.

Ultimately the Fed will be supportive, and provide a put option to assets as it always does and perhaps a further correction from here is somewhat healthy for markets but August can be a tricky month, because conditions are thin and cavalry from the Fed won’t arrive until September.

It’s going to be an interesting month. Let’s see what happens.

As always, I shall keep you posted here at Purity Macro.

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Disclaimer

The information provided in this post is for general use only and does not constitute a solicitation for investment. It should not be construed as professional financial advice. Seek independent professional consultation before making an investment decision.